CNP Series Report – EMV Part 1: The Long Run

When it comes to credit cards, the U.S. market has been utilizing the same magnetic-stripe technology for the last 40 years to transmit payment data from the cardholder to the card-present merchant. As with any 40 year-old technology, time has caught up with and passed it by in some ways, including how the industry handles security and fraud. One of the biggest pain points that magnetic-stripe credit cards pose is how easy it is to counterfeit cards for use in card-present environments to make fraudulent purchases. According to some reports, counterfeit-credit-card fraud accounts for approximately 40 percent of total credit-card fraud in the U.S.

Due to this large expense, as well as growing security concerns, the card networks have been driving the adoption of EMV (Europay, MasterCard and Visa) chip enabled credit cards for the last four years. But, there has been a bit of a chicken-and-egg standoff between the card issuers and card-present merchants. Issuing banks are not eager to spend the $2-$4 it costs to produce each card (in comparison to $.15 for cards with magnetic stripes) if merchants do not have the upgraded terminals to process these cards; likewise, the retail industry does not want to spend the estimated $35 billion to implement the terminals needed to process these cards because the financial benefit isn’t clear to them.

Ongoing Process

To loosen the logjam, the card networks imposed a deadline of October 1, 2015 for merchants and issuers to be prepared to process the new cards. While there are definite financial incentives for both parties to be ready, this deadline is not backed by law. According to MasterCard rules on the matter, the solution is simple: “The party, either the issuer or merchant, who does not support EMV, assumes the liability for counterfeit transactions (on outdated magnetic stripe credit cards).” Visa’s mandate is the same.

Until now, issuers have footed the bill for the estimated $3.8 billion in annual counterfeit card losses. But, the opportunity to pass this cost on to merchants has finally gotten the ball rolling on converting to chip-enabled cards. According to a report by Boston-based Aite Group, by the end of 2015, 70 percent of U.S.-issued credit cards and 41 percent of all U.S. debit cards will be chip enabled.

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